Oakdale MN Estate Planning | In the Lake Elmo Bank Building

A Spendthrift Trust Can Act as a Wealth Preserver

The primary goal of estate planning is to transfer your assets efficiently to your family or other beneficiaries. In addition, another equally important goal is to protect those assets for your family and beneficiaries. A spendthrift trust can be an invaluable tool for achieving these goals.

Spendthrift trust defined
A spendthrift trust prohibits a beneficiary from directly tapping its funds or transferring its rights to someone else. The trust can also deny access to creditors or a beneficiary’s ex-spouse.

Instead, the trust beneficiary relies on the trustee to provide payments based on the trust’s terms. These could be in the form of regular periodic payouts or on an “as needed” basis. The trust document will spell out the nature and frequency, if any, of the payments. Once a payment has been made to a beneficiary, the money becomes fair game to any creditors.

Be aware that a spendthrift trust isn’t designed primarily for tax-reduction purposes. Typically, this trust type is most beneficial when you want to leave money or property to a family member but worry that he or she may squander the inheritance.

For example, you might think that the beneficiary doesn’t handle money well based on experience, or that he or she could easily be defrauded, has had prior run-ins with creditors or suffers from an addiction that may result in a substantial loss of funds.

If any of these scenarios are possible, a spendthrift trust can provide asset protection. It enables the designated trustee to make funds available for the beneficiary without the risk of misuse or overspending. But that brings up another critical issue.

The trustee plays a major role
Depending on the trust’s terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, how much and when. The trustee may even decide if there should be any payment at all.

Or perhaps someone will direct the trustee to pay a specified percentage of the trust’s assets depending on investment performance, so the payouts fluctuate. Similarly, the trustee may be authorized to withhold payment upon the occurrence of certain events (for example, if the beneficiary exceeds a debt threshold or declares bankruptcy).

The designation of the trustee can take on even greater significance if you expect to provide this person with broad discretion. The trustee can be a trusted, experienced and competent family member or the trustee can be a CPA, attorney, financial planner or investment advisor, or someone else with the requisite experience and financial know-how. You should also name a successor trustee in the event the designated trustee passes away before the term ends or otherwise becomes incapable of handling the duties.

Other considerations
Be aware that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, government agencies may be able to access the trust’s assets — for example, to satisfy a tax obligation.

It’s also essential to establish how and when the trust should terminate. It could be set up for a term of years or for termination to occur upon a stated event, such as a child reaching the age of majority.

Virginia Ryan provides trust, will, probate, and business law services to clients in Maplewood, Minnesota, and the surrounding areas of North Oaks, White Bear Lake, Lake Elmo, Grant, Mahtomedi, Dellwood, Woodbury, Oakdale, Roseville, Little Canada, Shoreview, Vadnais Heights, St. Paul, Hugo, Lino Lakes, Stillwater.